Newly-hired employees often find themselves faced with completing a W-4 form from the IRS. The main function of the form is to discover what amount the employee is willing to have withheld from her pay. The amount withheld goes toward the employee’s yearly tax obligation to the IRS. Many young and single new hires will select a single or zero withholding allowance. Many times, employees select these amounts without fully understanding their significance.
TL;DR (Too Long; Didn't Read)
The single withholding allowance identifies the taxpayer as non married and, thus, the head of the household. The zero withholding allowance ensures that the individual's employer withholds the maximum possible amount relative to their tax bracket.
The W-4 Form
The IRS requires that all new hires complete a W-4 form. The form gathers information regarding an applicant’s Social Security number, address, marital status and number of dependents. The top of the form has instructions for the applicant, along with a calculator. When filling out the form, the new hire uses the calculator to determine what his withholding allowance should be. The calculator gives points for being the head of household and having children. The form also asks new hires to declare whether they are exempt or nonexempt from paying taxes. No one who is currently a dependent of someone else can claim an exemption for himself.
Single and Zero Withholding
Nonmarried single individuals most often will choose single or zero for the withholding allowance question on the W-4. Single withholding identifies the individual as the head of household. The IRS requires that certain stipulations be met before someone can claim themselves as head of household. It is important to read the W-4 instructions carefully to see if you can declare yourself as head of household. Individuals may also choose zero withholding, which allows the employer to withhold the maximum amount allowable for their tax bracket. If, for example, you are a single individual making about $50,000 annually, you are in the 22 percent tax bracket for the 2018 year, meaning 22 percent is the highest tax rate you will face on any portion of your income.
Using the Withholding Calculator
When completing the W-4, individuals should complete the tax work sheet to determine the amount of withholding. Students or those still living with parents can usually select zero. This is because they do not have deductions that would reduce their tax liability. If you own a home, have an IRA or can make any other deductions on your tax return, then you will want to complete the tax work sheet and use the calculator. By selecting zero withholding, you may be giving too much to the government. A withholding amount of one is better for those who have deductions. Individuals who are married or have children would probably not select zero or one unless they have other sources of income, which would necessitate the need to have more taxes withheld.
When to Update Your W-4
Life changes may bring a need to update the W-4 you have on file with your employer. Getting married or having children will add to the number of allowances you can claim. Another time to review your W-4 is after completing your tax return for the year. If you are receiving a large refund, it may be time to increase the number of allowances. A large refund means that you are loaning the government the use of your money for a year. Increasing the number of allowances gives you more money in your paycheck.